Calculating LTV

How to calculate LTV and why your business needs it

LTV (Lifetime Value) is the total profit one customer brings over the whole time they deal with a company. This number is important, but many business owners skip calculating it. The main reason is that it is hard: you need to combine data on all orders of each customer. Still, people often use a simple formula:

LTV = total revenue for a period / total number of customers for the same period

Say a company earned ₽10 million in a year and served 2,500 customers. In this case, LTV is ₽10,000,000 / 2,500 = ₽4,000.

But this approach does not show the main thing: how different types of customers behave, who comes back again and again, and who buys only once. For a more accurate picture, you need other ways to calculate it.

Other ways to calculate it

A more advanced way to calculate LTV looks like this:

LTV = average check × average number of purchases per year × average number of years the customer stays with the business

This formula is not so easy to use, especially if the company has no loyalty system or CRM. Without these tools, you will have to run surveys, which often give inaccurate and out-of-date data. It is much more reliable to use a CRM or a loyalty program: they already store all the data you need about customer behavior.

What understanding LTV gives your business

Once you have calculated LTV, the next question is: how do you use this number?

First, track how LTV changes regularly: by month, quarter and year. In a stable business with a good customer experience and well-built marketing, it should grow. A growing LTV means customers come back and spend more.

Second, LTV helps you see if the cost of attracting new customers is worth it. Compare LTV with CAC (Customer Acquisition Cost), the cost of attracting one customer, and you can judge how well your marketing spend works.

How to read the LTV to CAC ratio

Comparing these two metrics can tell you a lot about the financial health of your business:

• LTV:CAC = 1:1 - the business model is not stable, you need to rethink your strategy.

• LTV:CAC = 2:1 - profit is very low, you should boost marketing and improve your processes.

• LTV:CAC = 3:1 - a good number, the business is ready to grow.

• LTV:CAC = 4:1 and higher - great results, it makes sense to grow actively and invest in promotion.

How to raise LTV: practical steps

If your current LTV is low, work on getting more repeat purchases. CRM systems and loyalty programs are perfect for this: they let you split customers into segments and launch automations.

Here are a few tactics:

• Campaigns and reminders. Invite customers to come back with emails, notifications or offers.

• Points and private events. Run promotions and special events for regular customers to keep them more engaged.

• Location-based notifications. Send a message to loyalty program members when they are near your location. This is a great way to stay top of mind and show you care.

P.S. Work on raising LTV will only truly pay off if your service is of high quality. If marketing promises the customer certain feelings and experiences, the business must not only meet those expectations but go beyond them.